Exelon Earnings Call Nuggets: Target Expectation and Hedge Positions

Exelon Corp (NYSE:EXC) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Target Expectation

Greg Gordon – ISI Group: I think this is – a good quarter by the way and we are happy to see that pricing is starting to cooperate with your thesis. Few questions on those fronts and on cash flow, so the power of new business to go anniversary the mark-t-market hedges and the open gross margin is it fair to presume that you’ve lowered again your expectations for margins and/or volumes given that in ’13, ’14 and ’15 just given the persistently low level of pricing and low level of volatility as it relates to competitive energy supply?

Christopher M. Crane – President and CEO: Ken will address that and we’ll circle back if you have a cash flow question. Ken you want to.

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Kenneth W. Cornew – SVP and President, Exelon Power Team: That’s not the case actually in 2013 we have reduced our target expectation for power new business to go essentially because we got defensive on natural gas prices early in the quarter and hedge the portfolio tightly and missed an opportunity to gain some upside from spot prices in the first quarter. In 2014 and 2015 it’s actually a very different story. We have actually achieved new business targets as or better than expected in those years and when we do achieve those targets, what we do is we reduce the Power New Business/To Go online and it rolls into the mark-to-market of hedges. So our hedging position that we’ve had on, that’s associated with taking advantage of upside in the power markets is benefiting us in those two years. You have follow-up on free cash?

Greg Gordon – ISI Group: Yes. So when I look at Page 18 where you show the buildup to your consolidated cash flow outlook, there’s a lot of, what I would call relatively small changes, but the two big ones are the $225 million reduction in expected CFO from ExGen, but then also a $325 million decline in expected other cash flows. Can you dig a little bit deeper into those two items?

Jonathan W. Thayer – EVP and CFO: Sure. So, as we discussed previously, there’s some puts and takes as you point out. So from cash from operations, roughly $125 million decline relative to expectations is primarily related to ExGen and tax timing offset on a CapEx side by the cancellation of Dresden and Quad Cities MUR. The primary driver of the change in cash relative to the beginning of your forecast is lower financing at ComEd of $175 million and BGE of $50 million.

Greg Gordon – ISI Group: I just want to understand why in the course of this the last several months since you just gave us your fiscal year outlook recently, there’s been such a dramatic change in the expected CFO from ExGen. Is it related to the – for the hedging activity in the quarter – in the first quarter that went against you on gas or is it something else?

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Jonathan W. Thayer – EVP and CFO: No. The breakdown at ExGen is, of the roughly $250 million total change at ExGen specifically, roughly a third of that is cash tax timing offset by about $150 million of cash related net income. On the positive reduction in CapEx which I described related to the MURs and then an increase in the dividends on the financing lines to $200 million to $250 million.

Greg Gordon – ISI Group: Okay, and then at the bottom, the change in other, it was a $400 million help at the – on the year-end call and it’s now only $75 million?

Jonathan W. Thayer – EVP and CFO: It’s CP.

Hedge Positions

Daniel Eggers – Credit Suisse: Ken, just looking at the move up in power prices and the strength, you said that you guys hedged more aggressively earlier in the quarter and less later. Is there any relationship between the fact as you guys – you kind of took some liquidity pressure out of the market by selling, does that have an effect on power prices or did I misunderstand your first comments?

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Kenneth W. Cornew – SVP and President, Exelon Power Team: Really when I was referring to hedging and it was associated with our 2013 position. So, we took a 90, a low 90% hedge position and took it to a high 90% hedge position in 2013 alone. We just felt like, we are substantive on natural gas looking at early winter weather and obviously what’s happened over the last five years has indicated the risk of natural gas prices falling, didn’t happen, so we readjusted our portfolio in ’13. In ’14 and ’15, our hedging posture has been consistent with what we talked about for many quarter now. We’ve held our position of falling behind ratable as Jack indicated by about 6% in ’15 we’ve also held our position of utilizing natural gas and options to heat rates sized that’s another probably 8% in that 15 portfolio. So we are maintaining a substantial upside position in our (indiscernible)

Daniel Eggers – Credit Suisse: (indiscernible) is that the right way to think about that…

Christopher M. Crane – President and CEO: From a heat rate perspective we are more like 14% and 15%.

Daniel Eggers – Credit Suisse: Can you just give a little color on what you guys are seeing in the retail markets as far as the competiveness of that is that landscape changing all with movement and prices and generally in the past with new energy when prices rose, you saw more margin pressure in the business. Is that showing up right now, because it didn’t look like it showed up in the hedging disclosure you guys gave for non-Power New Business/To Go?

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Christopher M. Crane – President and CEO: We’ve seen the same behavior in the retail market essentially over the past several quarters of margins being on the low end of expected ranges or experienced ranges was interesting and maybe a little bit different about the first quarter this year is that customers are actually pausing to decide to re-contract and buy power because for the first time in a long time prices have not dropped going through winter and I believe a lot of customers were thinking that prices were going to go in a lower direction and would be great opportunity for them to lock in fixed price over the next couple of years. Prices have actually gone up and now you see a little bit of pausing from especially a commercial industrial contracting perspective. So very challenging and competitive environment remains. We have maintained our expectations in the disclosure for this quarter and we’ll continue to see how this shakes out.